Understanding the Davies Report: Rising Corporate Insolvencies Amid Tariff Worries and Sector Strains

Canadian Business Insolvency on the Rise

As Canadian businesses navigate a turbulent economic landscape, a recent report from Davies Ward Phillips & Vineberg LLP, titled Insolvency Now, sheds light on the persistent high levels of corporate insolvencies driven by U.S. tariff uncertainties and sector-specific pressures. Published on May 20, 2025, the report highlights critical challenges facing industries such as retail, manufacturing, and energy, offering valuable insights for business owners seeking to understand and mitigate risks in this volatile environment. Below, we summarize the key findings of the Davies report, explore its implications for Canadian businesses, and provide guidance on accessing the full report for those who wish to dive deeper.

Key Findings of the Davies Report

The Insolvency Now report, authored by Davies partner Natasha MacParland, reveals that corporate insolvencies in Canada remained at historically high levels throughout 2024, with filings under the Companies’ Creditors Arrangement Act (CCAA) reflecting significant economic strain. The report identifies several critical factors contributing to this trend:

Tariff-Induced Trade Uncertainty: The introduction of 25% U.S. tariffs on $155 billion worth of Canadian exports, effective March 4, 2025, alongside Canada’s retaliatory measures, has created a ripple effect across supply chains. While the full impact of these tariffs is still unfolding, the uncertainty surrounding trade policy has already disrupted business planning, increased costs, and reduced competitiveness in U.S. markets. MacParland notes that the unpredictability of tariff policies—exemplified by sudden announcements and reversals—has made it challenging for businesses to strategize effectively.

Sector-Specific Pressures: The report highlights manufacturing, wholesale trade, and retail as the most vulnerable sectors, forming a “chain of vulnerability.” Manufacturing leads in insolvency filings, driven by high debt levels, rising input costs, and reduced U.S. demand due to tariffs. Retail and wholesale trade face secondary effects, as weakened manufacturing output strains their operations. The energy sector, despite a lower 10% tariff on exports, is also under pressure due to its significant U.S. market exposure, with companies like Enbridge Inc. and TC Energy facing risks from reduced revenue streams.

Declining Business Formation: The report notes a net loss of 391 businesses in 2024, a stark contrast to a net gain of 4,580 in 2023. This decline in new business openings, coupled with higher closures, signals a troubling trend for economic vitality. MacParland emphasizes that voluntary closures and insolvencies are contributing to a shrinking business landscape, particularly for small and medium-sized enterprises (SMEs).

Economic and Policy Context: High inflation, slowing economic growth, and the withdrawal of COVID-era government supports have compounded financial pressures. The report warns of a potential “zombie firm effect,” where unviable businesses are artificially propped up, delaying necessary restructuring or closures. Additionally, the upcoming 2026 review of the Canada-United States-Mexico Agreement (CUSMA) adds further uncertainty, as businesses lack clarity on future trade rules.

Impact on Canadian Businesses

For business owners, the Davies report underscores several immediate and long-term challenges:

Financial Strain and Cash Flow Issues: Tariff-related cost increases, such as higher input prices and supply chain disruptions, are squeezing profit margins. SMEs, which often lack the financial reserves of larger firms, are particularly vulnerable. The report cites a 28.6% rise in business insolvencies in 2024 compared to 2023, with small businesses bearing the brunt due to limited access to capital and higher borrowing costs.

Sector-Specific Risks: Manufacturers face reduced U.S. demand and higher costs for imported components, while retailers struggle with weakened consumer spending and supply chain bottlenecks. Energy companies, despite lower tariffs, must navigate potential revenue losses from U.S. markets, which account for significant portions of their income (e.g., 50% for Enbridge and TC Energy).

Employment and Supply Chain Ripple Effects: Persistent insolvency risks could lead to layoffs, reduced investment, and disrupted supply chains. The report warns that economic confidence may wane, further dampening consumer demand and business expansion plans.

Strategic Challenges: The unpredictability of trade policies complicates long-term planning. Businesses are forced to allocate resources to compliance (e.g., 7% of revenues for some manufacturers) and explore costly alternatives like diversifying suppliers or increasing inventory buffers, which can strain finances further.

Why This Matters for Business Owners

The Davies report serves as a critical wake-up call for Canadian business owners, highlighting the need for proactive measures to weather the current economic storm. Persistent high insolvency rates could erode economic confidence, discourage investment, and disrupt supply chains, affecting not only individual businesses but entire industries. For SMEs, the stakes are particularly high, as they face greater financial constraints and exposure to trade disruptions. Understanding these risks is the first step toward building resilience and adapting to a challenging trade environment.

What Business Owners Can Do

To mitigate the risks outlined in the Davies report, business owners can consider the following strategies:

Strengthen Financial Resilience: Review cash flow projections and explore financing options to buffer against tariff-related cost increases. Engage with financial advisors to assess insolvency risks and explore restructuring options if needed.

Diversify Supply Chains: Reduce reliance on U.S. markets by exploring alternative suppliers or markets, such as Asia or Europe. The report notes that 44% of businesses are already reconfiguring supply chains to mitigate tariff impacts.

Leverage Government Support: Take advantage of programs like the Canada Trade Impact Program or Strategic Innovation Fund to offset tariff-related costs or invest in operational efficiencies. The Canadian Federation of Independent Business (CFIB) also advocates for returning retaliatory tariff funds to affected businesses.

Monitor Trade Developments: Stay informed about CUSMA negotiations and tariff policy changes. The report emphasizes the need for “lead time and certainty” to plan effectively, so businesses should actively track policy updates.

Adopt Technology and Efficiency Measures: Invest in technologies like AI-driven risk modeling or automation to reduce costs and enhance competitiveness, as exemplified by Shopify’s recent AI tool expansions for e-commerce.

Where to Find the Davies Report

For business owners seeking a deeper understanding of the Insolvency Now report, the full document is available on the Davies Ward Phillips & Vineberg LLP website at www.dwpv.com. The report is part of the firm’s quarterly Insolvency Now series, with the specific issue referenced here published on May 13, 2025. Additional insights and data can be found in related publications, such as the Canadian Lawyer article summarizing the report, accessible at www.canadianlawyermag.com.

Conclusion

The Davies Insolvency Now report paints a sobering picture of the challenges facing Canadian businesses in 2025, driven by U.S. tariffs, sector-specific pressures, and broader economic uncertainties. For business owners, particularly in retail, manufacturing, and energy, the report highlights the urgency of adapting to a volatile trade environment. By understanding the risks, exploring strategic options, and leveraging available resources, businesses can better navigate these challenges and position themselves for resilience. For those seeking to dive deeper, the full report offers detailed data and insights to inform decision-making in these uncertain times.

Sources:

• Davies Ward Phillips & Vineberg LLP, Insolvency Now, May 13, 2025

• Canadian Lawyer, “Canadian corporate insolvencies stay high amid tariff worries and sector strain,” May 20, 2025

Rising Corporate Insolvencies